CASH MANAGEMENT OBJECTIVES AND DECISIONS
Plan, manage, monitor, and control cash flows in order to create an acceptable balance between holding too little and too much cash. The ideal cash management system which allows the small business to operate for extended periods with cash balances near or at a level of zero is possible only under two conditions: (1) a perfect forecast of future net cash flows (cash inflows minus cash outflows) and (2) perfect matching of cash receipts and disbursements. Unfortunately, these two conditions are not commonly seen. Note: Perfect cash forecasting is not possible; inflows and outflows do not occur at the same time in the same amounts. Some inflows and outflows are uncertain, others are irregular, and still others are continual.
Some objectives of cash management are:
To reduce the need to borrow and if needed, to borrow at lower interest costs.
To minimize idle cash balances.
To maximize the return on surplus funds.
To reduce bank charges and keep transaction costs as low as possible.
Your cash management decisions must take into account your answers to the following questions:
What can be done to speed up collections and stretch out cash outflows`?
How can I stabilize cash flows? For example, can I add a non-seasonal product to my seasonal products?
How can I earn the best return on my money?
When should I arrange for financing, and how much do I need? How are my cash flows affected during periods of inflation and recession?
How much of a cash balance should I hold at different times during the year? This is especially important for a seasonal business.
Where should I invest my excess cash and for what time period (e.g., 3-month treasury bill, 6-month certificate of deposit)?
Are any of my cash balances restricted and unavailable for use? An example is a compensating balance at the bank, which is funds held as collateral for a loan.